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Calpers Ends Its Wall Street Support Program, Stops Investing in Hedge Funds Print
Sunday, 21 September 2014 08:38

Gretchen Morgenson had a good piece on the decision by the California Public Employees Retirement System (Calpers) to stop investing in hedge funds. She pointed out that such investments have been big losers for pension funds since the money transferred to the managers vastly exceeded any investment gains.

Interestingly, just last week the NYT praised to the sky Rhode Island's Treasurer and now Democratic gubernatorial candidate Gina Raimondo for a pension "reform" strategy that put much of the state's pension funds into hedge funds. Apparently, public subsidies for Wall Street still rank as an important policy goal in some circles.

The Costs of Protectionism: Health Care Rip-offs Print
Sunday, 21 September 2014 08:00

The NYT had a fascinating piece on medical care freelancers: health care professionals of various types who show up at hospitals and pass along huge bills to patients undergoing treatment. According to the article these contractors generally do not make their employment status known to patients at the time, so they would reasonably assume that they are hospital staff who would be covered under normal billing procedures. Patients often first discover that this is not the case when they get bills for services, which can run into the tens or hundreds of thousands of dollars.

The piece explains that there have been some efforts to regulate these practices, but the industry has been largely successful in blocking serious restrictions. This presents another case of the enormous potential gains from free trade in health care. Other wealthy countries do not have medical scammers running around in their hospitals. If people could arrange to go to Canada, Europe, and many of the top notch facilities in the developing world, they could save a huge amount on their procedures, even after covering the cost of travel for themselves and their family members. Large-scale trade would likely put the medical scammers in the United States out of business quickly, since hospitals that did not bar them would not be able to get any patients.

Unfortunately, protectionists largely dominate public debate so freer trade in health care is almost never discussed. Economists like to help the protectionists in this respect by politely agreeing not to discuss trade in medical services. This makes it easier for them to say silly things about inequality being due to globalization and technology. They get to conveniently ignore the fact that our doctors make twice as much as doctors in other wealthy countries, not because of technology and globalization, but because they enjoy protection from international competition.


Canada, The Conservatives' Model Country, Has Single Payer and a Housing Bubble Print
Sunday, 21 September 2014 07:46

Josh Barro has an interesting article noting how conservatives in the U.S. appear to have a love affair with Canada, based on its tax cuts and promotion of fossil fuel production. Barro points out that a big part of Canada's low-cost government is its single payer, or universal Medicare, system. According to the OECD, Canada spends 10.4 percent of its GDP on health care (mostly from the government) whereas the U.S. spends 16.2 percent of GDP (a bit more than half from the government). The difference would come to more than $1 trillion a year in the current U.S. economy.

The housing bubble is the other striking story of the Canadian economy. The ratio of house prices to rent has more than doubled since the turn of the century. When this bubble bursts, Canada is not likely to look very pretty.

Should We Get Really Excited About a 0.04 Percentage Point Increase In GDP Growth? Print
Saturday, 20 September 2014 16:24

People often confuse percent and percentage points. (I've even done it myself.) It makes a big difference. The Wall Street Journal told readers about G-20 plans to increase growth by 2 percent.

If this is accurate, then the goal is to have growth that is 2.0 percent faster than the baseline. In the U.S. case the baseline projections for annual growth are a bit more than 2.0 percent. The G-20 plans would then raise this figure by 0.04 percentage points. That would be nice, but not a terribly big deal. After a decade, GDP would be 0.4 percent higher than in the baseline scenario, a bit less than the economy grows in a normal quarter.

Alternatively, the article could have meant increasing growth by 2.0 percentage points. That would raise growth from the baseline of 2.0 percent to 4.0 percent. That would be a big deal, but doesn't sound very plausible. A big stimulus could perhaps do this for a year or two, but no one seems to be talking about increasing the deficits by $300 billion or $400 billion.

Anyhow, it is difficult to understand what the agenda of the G-20 is supposed to be. Perhaps the use of percent is correct, but if so, we are probably wasting our money sending our leaders to focus on such small stakes.

News for New York Times: Affordable Care Act Affects Women Print
Friday, 19 September 2014 04:41

We are used to politicians making bizarre distinctions, but we expect a little better from the NYT. Therefore many readers were probably surprised to see the NYT imply that the Affordable Care Act (ACA) does not affect women in an article reporting on former Secretary of State Hillary Clinton's campaigning for Democratic candidates.

"Democrats in several key Senate races have attempted to shift the debate from President Obama and the Affordable Care Act to issues affecting the key constituency of women, whose votes could sway close races."

Separating the ACA from issues that affect women is really almost otherworldly, given the importance of health care, especially to mothers of young children. In fact, our analysis of changes in voluntary part-time employment showed a sharp jump in the number of young parents in this category in 2014 compared with 2013. The implication is that many parents of young children prefer to work part-time in order to spend more time with them. The ACA gave them this opportunity since they can now get insurance through Medicaid or the exchanges and therefore are not dependent on employer provided health insurance. Generally workers have to work full-time to qualify for employer provided insurance.

None of the policies that the NYT refers to as affecting women are likely to have as much impact on the lives of most women as the ACA. The Democrats may for whatever reason not want to talk about the ACA, but the NYT should not play along with their silliness.

The Fed and Inequality Print
Thursday, 18 September 2014 06:49

Charles Lane has a column in the Washington Post arguing that the Fed has contributed to inequality with its low interest policy. Essentially the argument is that low interest rates have helped to push up asset values, most importantly stock prices. Since the rich have stock and most people don't, this means the rich are getting richer relative to everyone else. Since a lot of people who should know better have made this argument, it is worth addressing.

First, it is important to understand the nature of the inequality. If we're looking at wealth, the issue is pretty clear. Higher stock prices mean people who own stock are wealthier relative to the population as a whole. (Remember this when you hear reporters tell you the good news that the stock market is up.)

But note the nature of the increase implied here. Grabbing our old "other things equal," lower interest rates mean higher stock prices. However, this also means that higher interest rates will mean lower stock prices. Most people expect that at some point interest rates will rise due to a strengthening economy. (Many economists want the Fed to raise interest rates now.) So we can expect the wealth inequality the Fed has created with its low interest rate and quantitative easing policies to go away once the economy is approaching its potential level of output.

In that case we are looking at an explicitly temporary increase in inequality. Should we be upset by this?

The situation is even more striking if we look at income. If we count the capital gains in the stock market as income, then we have seen a huge increase in income inequality as stock prices roared back from their 2009 lows. Here also part of this will be reversed as the rich have capital losses when interest rates go back up. (Some of the increase is just a reversal of a market that was depressed due to fears of economic collapse.)

It's difficult to see the big problem here. Remember, the economy's problem is too little demand. Let's say that a few more times just in case anyone in a policy position in Washington is paying attention. The economy's problem is too little demand.  The economy's problem is too little demand. The economy's problem is too little demand.



Europe Is Already Suffering From the Bad Story With Deflation Print
Thursday, 18 September 2014 04:14

The NYT gave us another article from the cult of zero, which highlighted a modest upward revision in the year over year inflation rate from 0.3 percent to 0.4 percent. The piece told readers:

"The revised figure for August suggests that inflation may have stabilized, but is unlikely to end a debate among economists about whether the eurozone is at risk of deflation — a broad, sustained decline in prices that is associated with depression and high unemployment."

Actually Europe is already facing a period of very low inflation associated with depression and high unemployment. The low inflation rate makes it difficult for the European Central Bank (ECB) to push down the real interest rate so as to boost demand. Even at 0.4 percent the inflation rate is well below the ECB's 2.0 percent target. And given the weakness of the euro zone economy, a higher inflation rate in the range of 3-4 percent would be desirable.

As the piece notes, many countries in the euro zone now actually have deflation. This is the only way they have to regain competitiveness with Germany, as long as Germany maintains a very low inflation rate. If Germany had a higher inflation rate, it would be possible for countries like Greece and Spain to gain competitiveness with moderate positive inflation. As it is, they have no choice but to endure massive unemployment in order to force wages and prices downward.

The piece is also mistaken in telling readers:

"When deflation takes hold, consumers delay major purchases because they expect prices to fall further. Corporate sales and profits suffer, which forces companies to lay off workers, creating a vicious circle of falling demand."

Actually at low rate of inflation many prices are already falling. The overall inflation rate is simply an average of all price changes. When the inflation rate is near zero, many prices will be falling. The positive rate just means that somewhat more prices are rising, or that some prices are rising more rapidly.

Furthermore actual market prices may still be rising even if the measure of prices used in the government data shows falling prices. Statistical agencies use quality adjusted prices. The measures of quality improvement may more than offset a nominal increase in prices. Quality improvements are the main reason that computer prices have shown sharp price declines in government data over the last three decades. They are also the reason that car prices have been virtually unchanged from their level of 18 years ago.



                                  Consumer Price Index, New Vehicle Component

car prices

                                   Source: Bureau of Labor Statistics.

The New York Times Doesn't Like the U.K. Health Care System Print
Wednesday, 17 September 2014 14:15

That is what readers of an article headlined "Health Care for Britain in Harsh Light" would likely conclude. The intention of the article certainly seems to be to put the health care system in Britain in a harsh light.

The substance of the article is that the National Health Service (NHS) refused to pay for a young boy suffering from a brain tumor to go overseas to get a new treatment. The treatment is expensive, and according to his doctors and other medical experts, not the best way to treat the tumor.

It is not clear what the obvious flaw is in the NHS. Few people in the United States have insurance that will pay for expensive procedures that are not considered effective. In fact, in many cases insurers won't pay for expensive procedures even if they are effective.

Okay, so readers should assume that the NYT or one of its editors doesn't like the NHS. This is really the only information conveyed in this article.

Crapo-Johnson and Affordable Housing Print
Wednesday, 17 September 2014 06:59

The Post ran a piece today discussing the agenda of Julian Castro, the new secretary of the Department of Housing and Urban Development Secretary. At one point the piece discusses affordable housing. It then refers to the Johnson-Crapo bill for privatizing Fannie Mae and Freddie Mac. This bill has a provision for a fund that would support affordable housing.

It would have been worth noting the size of the fund. It would get its revenue from a 0.1 percent tax on mortgages issued through the system. If an average of $1.5 trillion a year in mortgages are issued, this tax would raise $1.5 billion annually.

If it costs $150,000 to build an average unit of affordable housing, this fund will be able to support construction of roughly 10,000 units a year, an amount equal to roughly 0.007 percent of the housing stock. Alternatively, if this money was used to subsidize rent, it would provide a subsidy of $1,500 a year ($125 a month) to 1 million households.

Both of these routes may be very helpful to the people who benefit, but they are not of a scale necessary to ensure affordable housing to low and moderate income families. It is worth noting in this respect that there is no dispute that the Johnson-Crapo bill proposal would raise the cost of mortgages. The range of estimates are in the neighborhood of 0.5 percentage points to over 2.0 percentage points.

If we assume that the actual impact is close to a 0.5 percentage point increase, this would imply that a family with a $200,000 mortgage would pay an extra $1,000 a year in interest due to Johnson-Crapo. This is likely to have far more impact in making housing less affordable than the subsidies funded through the bill's tax to promote affordable housing. 

Timothy Geithner's Revenge: A Broken Bond Rating System Print
Tuesday, 16 September 2014 19:12

One of the factors that made it easy for the housing bubble to be inflated to ever more dangerous levels was the conduct of the credit rating agencies. They gave every subprime mortgage backed security (MBS) in sight top investment grade ratings. This made it easy for Citigroup, Goldman Sachs and the rest to sell their junk bonds all over the world.

There was a simple reason the credit rating agencies rated subprime MBS as AAA: money. The banks issuing the MBS pay the rating agency. If the big three rating agencies (Moody's, Standard and Poor's, and Fitch) wanted more business, they knew they had to give favorable ratings. The banks weren't paying for an honest assessment, they were paying for an investment grade rating.

There is a simple way around this conflict of interest. Have a neutral party select the rating agency. The issuer would still pay for the review, but would have no voice in selecting who got the job.

Senator Al Franken proposed an amendment to Dodd-Frank that would have gone exactly this route. (I worked with his staff on the amendment.) The amendment would have had the Securities and Exchange Commission pick the rating agency. This common sense proposal passed the Senate overwhelmingly with bi-partisan support.

Naturally something this simple and easy couldn't be allowed to pass into law. The amendment was taken out in conference committee and replaced with a requirement for the SEC to study the issue. After being inundated with comments from the industry, the SEC said Franken's proposal would not work because it wouldn't be able to do a good job assigning rating agencies. They might assign a rating agency that wasn't competent to rate an issue. (Think about that one for a moment. What would it mean about the structure of an MBS if professional analysts at Moody's or one of the other agencies didn't understand it?)

Anyhow, as is generally the case in Washington, the industry got its way so the cesspool was left in place. Timothy Geithner apparently is proud of the role he played in protecting the rating agencies since he touted this issue in his autobiography. Geithner is of course making lots of money now as a top figure at the private equity company Warburg Pincus, so everybody is happy.

This is all relevant now because it seems that the rating agencies are back to their old tricks, or so Matt O'Brien tells us in Wonkblog. There has been a flood of new bonds backed by subprime car loans. Apparently Fitch is getting almost none of this rating business because it refuses to rate garbage as AAA.

O'Brien does a good job in calling attention to what is going on in this market, but it would be good to remind everyone of why it is still going on. We do know how to fix the problem. It's just that Timothy Geithner and his friends don't want the problem fixed.


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.